July 2010

A slowdown in global industrial production is becoming evident, as the inventory cycle is drawing to a
close, notably in the United States, and as fiscal support measures in key economies are being withdrawn.

The 2006-08 commodity price boom was one of the longest and broadest of the post-WWII period. The price boom emerged in the mid-2000s after nearly three decades of low and declining commodity prices (see figure). The long-term decline in real prices had been especially marked in food and agriculture. Between 1975-76 and 2000-01, world food prices declined by 53 percent in real US-dollar terms. Such price declines raised concerns, especially with regard to the welfare of poor agricultural producers.

One upshot of the recent increase in volatility in financial markets has been a generalized return (again) into the relative safety of U.S. Treasuries: The 10-year is down 30 percent for the year (to 296 bps), and the 30-year down about half that, standing at 398 bps (see figure). A common refrain heard among market commentators is that with Europe in the throes of a sovereign debt (and now possibly full-blown financial) crisis, this is a flight to quality, and that the U.S. is remains the best of the bunch of bad options.